NEW YORK (Reuters)—A federal judge narrowed a $1 billion lawsuit against owners of the New York Mets baseball team by the trustee seeking money for Bernard Madoff's victims, and cast skepticism on how much might ultimately be recovered.

Tuesday's ruling by U.S. District Judge Jed Rakoff in Manhattan could help the trustee, Irving Picard, force Mets owners to turn over their alleged $300 million of "fictitious profits" from investing with Bernard L. Madoff Investment Securities L.L.C., where they were once customers.

But he said Mr. Picard could pursue $700 million of principal from the owners, including Fred Wilpon and Saul Katz, only by proving they "willfully blinded themselves" to "red flags" of Mr. Madoff's epic Ponzi scheme, reflecting a lack of good faith.

Team owners had sought to dismiss the lawsuit, claiming they did not suspect Mr. Madoff was running a Ponzi scheme, and never bought insurance to protect themselves against fraud.

The lawsuit has threatened the owners' hold on the Mets, which are losing tens of millions of dollars a year, prompting them to try selling part of the Major League Baseball team.

Talks to secure a $200 million minority investment from Greenlight Capital hedge fund manager David Einhorn broke down three weeks ago.

A spokeswoman for Mr. Picard said the trustee had no comment pending a "thorough evaluation" of the opinion. Lawyers for the Mets owners were not available for comment.

Mario Cuomo, the former New York governor mediating the dispute, also had no immediate comment.

Judge Rakoff dismissed nine of 11 counts in what he facetiously called Mr. Picard's "short and plain" 373-page complaint against Messrs. Wilpon, Katz and others at their firm, Sterling Equities.

One surviving claim alleges actual fraud, and the other would subordinate the defendants' claims against the Madoff firm's bankruptcy estate to other creditor claims. Among the dismissed claims were some alleging "constructive fraud."

Judge Rakoff ordered both sides to appear at a hearing Wednesday to discuss what is next in the case. He indicated last month that a trial could begin in March.

But in his ruling, Judge Rakoff said the trustee could face an uphill fight to show that Messrs. Wilpon and Katz failed to act in good faith and intentionally turned a blind eye to Mr. Madoff's fraud.

"If, simply confronted with suspicious circumstances, (an investor) fails to launch an investigation of his broker's internal practices—and how could he do so anyway?—his lack of due diligence cannot be equated with a lack of good faith," the judge wrote.

Summarizing Mr. Picard's amended complaint filed on March 18, Judge Rakoff said the trustee sought to hold Mets owners responsible for their alleged pursuit of "substantial short-term profits," even as they tried to curb risk by considering fraud insurance and creating their own hedge fund to limit exposure.

"Although the defendants vehemently deny these accusations," Judge Rakoff wrote, "the amended complaint, while less than overwhelming in this regard, pleads sufficient allegations to survive a motion to dismiss so far as this claim of willful blindness is concerned."

Mr. Picard has filed more than 1,050 lawsuits on behalf of former Madoff customers seeking in excess of $94 billion.

Judge Rakoff oversees the largest of these lawsuits, a $58.8 billion case against defendants including Bank Medici A.G. founder Sonja Kohn and Italy's UniCredit S.p.A.

Another judge is reviewing Mr. Picard's $19.9 billion case against JPMorgan Chase & Co., once Mr. Madoff's main bank.

Mr. Madoff, 73, is serving a 150-year prison term. He pleaded guilty in March 2009 to running his Ponzi scheme.

The case is Picard vs. Katz et al., U.S. District Court, Southern District of New York, No. 11-03605.